August 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns  over time with a strong focus on capital preservation. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12.3% per annum net of fees since inception. Our active asset allocation approach is best illustrated in the following chart.


Executive Summary

One by one, the stock market leaders are falling. Apple is the latest casualty, closing below its 200 day moving average for the first time in over three years. The FTSE World Equity Index followed suit this week too. Bonds still look good despite the many top callers and we could see another run to new highs later this year. Meanwhile, action in the gold market is hotting up. The People's Bank of China added another 25 tonnes of gold to their reserves in July, while also announcing a devaluation of their currency this week. The PBOC is making explicit statements linking monetary policy moves to their continuing accumulation of gold for those interested in connecting the dots. The gold market is turning back up and the miners are leading the way, +20-30% in the last week alone.

Stock Market Update

The FTSE All World Index, the benchmark for active global equity fund managers, includes stocks from North America (54%), Europe (23%) and Asia (23%) and provides an excellent read of the overall health of the stock market. The recent deterioration in the trend has us concerned. The stock market today is showing signs of weakness similar to the 2007-2008 experience just prior to the wheels coming off and stocks in aggregate are more expensive today than they were in 2007.


Despite the FTSE All World Index making a higher high in 2015, relative strength (RSI at the top of the chart) has weakened, which means the market is losing upside momentum. Fewer stocks are participating in the market advance. One by one, the market leaders are falling. Apple, the largest company in the world by market capitalization at $650 billion, is the latest casualty, closing below its 200 day moving average for the first time in over three years. The FTSE All World Index is also now trading below its 50 week moving average. We continue to advise caution on stocks, particularly as we head into the more volatile months of August, September and October.


A closer look at the S&P 500 on a sector-by-sector basis shows rotation this year out of the mid-cycle sectors (Materials, Industrials, Energy and Telecom Services) and into the late-cycle defensive sectors of Healthcare, Consumer Staples and Utilities. This is classic behaviour as fund managers switch to defence and prepare to protect their portfolios from the next multi-year move lower in the stock market.


In July 2015 for example, the Materials, Industrials, Energy and Telecom Services sectors declined by an average -4.8%. Year-to-date, they have fallen by a combined -7.3%. All four sectors are now trading below their long-term moving averages, which in turn are  gradually shifting from uptrend to downtrend. In contrast, the late-cycle Healthcare, Consumer Staples and Utilities stocks gained +4.6% in July and are +2.5% year-to-date. The late-cycle sectors continue to trade above their long-term moving averages, which in turn continue to rise in bullish fashion.


So today we have a relatively overvalued stock market, where late-cycle defensive sectors have begun to outperform mid-cycle stocks. We see evidence of deteriorating upside momentum and bonds have once again started to outperform stocks, as evidenced in the chart below. So, we continue to favour a defensive position in the Active Asset Allocator of 20% equities / 30% bonds / 30% gold / 20% cash.


For more information on our stock market analysis, please get in touch. You can reach Brian Delaney at or 086 821 5911.

Bond Market Update

Calls for the death of the bond bull market are two-a-penny but may yet be premature. US Treasuries rallied +35% in 2014 following a technical breakout clearly evident on the next chart. US Treasuries then corrected during the first 6 months of 2015 but now appear to be setting up for another run higher. A higher high in the coming weeks will confirm the multi-year bull market is still in progress. A lower high may signal that the bull market is ending, though we are not ready to make that call just yet. 


Investment grade corporate bonds have corrected in tandem with government bonds but also look set to turn higher once again. The PIMCO Investment Grade Corporate Bond Fund for example tacked on +16% during the last rally. We could experience a similar move over the next 6-12 months. We have a small allocation to corporate bonds in the Active Asset Allocator and will look to increase this position, depending on how well the credit market holds up on the next correction in stocks.

While government and corporate bonds continue their bullish advance, we continue to avoid high yield (Junk) bonds, which have a strong positive correlation to the stock market. Junk bonds plunged -41% during the last stock market collapse in 2008, offering no protection for investors. Junk bonds are once again leading the market lower. JNK peaked in August 2014, made a lower high in May 2015 and has fallen by -5% so far in the last three months.


For more information on our bond market analysis, please get in touch. You can reach Brian Delaney at or 086 821 5911.

Gold Market Update

For the first time since 2009, the People's Bank of China (PBOC) reported last month that they had increased their official gold reserves by 60% from 1,054 tonnes to 1,658 tonnes. This week, they reported an additional purchase of approximately 25 tonnes of gold. The following day, the PBOC devalued their currency by 1.9%. For those paying attention and connecting the dots, the PBOC is making explicit statements linking monetary policy moves to their continuing accumulation of gold. The Chinese yuan/renmimbi (RMB) is slowly moving from a fixed to a floating exchange rate. We are witnessing the early stages of the emergence of a new world reserve currency backed by gold that will eventually compete with the mighty USD. The process may gather pace if the USD Index tops out over the next 12 months.


A declining dollar could be the catalyst to kick start the gold bull market again. It is certainly time. Gold has just completed a 50% retracement of the 2001-2011 bull market. Commercial traders who are always short gold to some degree to hedge their annual production have their smallest short position on in many years. 

In the past week, the gold miners have rallied 20-30% off their lows on heavy volume, potentially showing gold the way. It is too early to tell whether a new bull market has begun, but it very possibly has. We should expect at least 5-6 weeks of rising prices for both gold and the miners. 


For more information on our gold market analysis, please get in touch. You can reach Brian Delaney at or 086 821 5911.